February 6, 2017    6 minute read

What Mexico’s New Energy Reform Could Mean

The New Mogul    February 6, 2017    6 minute read

What Mexico’s New Energy Reform Could Mean


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Mexico’s statutory public holidays are steeped in history. There’s a celebration of the country’s independence in 1825, the anniversary of Mexico’s constitution first commemorated in 1917, and the honouring of the nationalisation of oil reserves back from foreign companies in 1938 by patriotic hero General Cardenas.

The latter offers only a partial understanding of how deeply the Mexican people feel about state ownership of natural resources. Government-owned Pemex holds an unabridged monopoly over the country’s oil and gas industry, whilst state behemoth Federal Electricity Commission is involved from upstream to distribution and everything in between.

1960was the last time Mexico’s constitution was changed

It might sound like the fastest route out of power for current President Enrique Pena Nieto to introduce a reform proposal threatening to unwind the government’s hold on the energy industry. Yet Nieto’s proposal, first outlined in 2013, is both undeniably required and “nakedly economic” as the Economist puts it. If passed in congress, the new constitution will allow private investment from non-Mexican domiciled companies in the nation’s resources. It will not, however, permit investment in tangible Mexican assets or production owned by the country, only profit sharing.

“This is not a reform; it’s a revolution on an unprecedented scale”

Dr Faith Birl, Executive Director, IEA

For the first time since 1938, international companies will be allowed to execute contracts for upstream ventures like oil and gas development, and downstream business in refining, shipping and petrochemicals to name a few. So what is driving Mexico to repeal the same expropriation of assets they fought for almost 80 years ago and celebrate annually with a day off?

Was There More Down There?

Cantarell in the Bay of Campeche, Mexico is the world’s 6th largest oil reserve by recoverable barrels of crude oil. Thanks to a mouthwatering extraction depth of just over a kilometre, the ageing supergiant* managed over 2.1 million barrels a day at its peak, roughly 60% of Mexico’s total production. (*category for reserves with over 10 billion barrels of crude oil – in perspective, Cantarell is approximated at 35bn, of which 18bn are recoverable).

The only problem is, that peak was in 2003. Crude oil production of almost every grade has plummeted since 2004, knocking nearly 1 million barrels a day off the world’s seventh largest producer’s total output.

Screen Shot 2017-02-05 at 21.53.52

(Source: IEA)

Pemex is running out of shallow water deposits to open, whilst failing miserably to exploit Mexico’s vast unconventional oil sources that are estimated to account for over half of current reserves. The state oil giant has made 23 attempts costing a total of $70bn in the last decade in both deep water and shale rock formation deposits with only one success. They lack both the capital and technology to take advantage of these resources.

2.2trn approximated no. of barrels in Canada’s tar sand reserves

Enter the international oil giants, riding on the back of Nieto’s reforms to Mexico’s rescue. The government receives revenues from the export of oil it couldn’t otherwise extract the markets greatest players get a ticket to a gargantuan 21st-century natural resource auction. The Chicontepec Basin is an almost untouched 3,800 square kilometre reserve, mainly as a result of the extra-heavy crude that calls it home.

An extra heavy crude is only an option for the most advanced drilling operations due to its viscosity and the oil variety is only produced in two other locations worldwide; Canadian tar sands and Venezuela. Intervention and investment from global oil giants could put Mexico in competition for west-coast American refineries and more importantly for heavy crude’s newest consumer, Asia.

The IEA indicated Mexico’s proposed reforms could add a million dollars a day of crude oil back to production, compared to a mirrored reduction should no policy change take place.

Buy, Sell and Lose?

Pemex was performing poorly even before it began to run out of reserves to drill and global oil prices hit record lows. When the President chooses your CEO, the Energy Minister chairs your board of governors and the Finance Committee decides your budget, efficiency becomes a nice-to-have.

The company was in fact in 2012 pulling crude oil out of the ground at an average of $7 a barrel, exporting it at prices often well above $90 and still managing to post a loss of almost thirty billion dollars. The oil and gas producer has been attempting for the past four years to plug a £100bn shortfall in its defined contribution pension plan.

Screen Shot 2017-02-05 at 21.55.24

(Source: The Economist)

Having said that, the size of the pension problem for Pemex is a combination of poor management and an unfathomably large workforce. As with many state-owned companies, unrealistic employment targets often result in an unprofitable business model. Pemex is almost without competition in that department, producing only 25 barrels of crude per employee, which is the lowest amongst its peers and only challenged by managerially similar Petrobras.

On the Sidelines

The government is not the only group benefitting from the reforms. Mexican business and the manufacturing industry especially have suffered monumentally high electricity prices, created by the same monopoly and inefficiency present in the Federal Electricity Commission as in Pemex. Private contracts in downstream and distribution projects will create some much-needed competition.

Renewables are also part of the reform but left behind in the rhetoric somewhat. Mexico has a target for 2024 for 35% of its energy consumption to come from clean sources, and the IEA reports similarly that over half of the new projects launching in the region between now and 2040 are of a renewable nature.

A Goldman Sachs report on the reforms, however, mentioned renewables once in its 28 pages and oil a total of 64 times. The government will need to make sure its climate ambitions do no come second to big oil, especially as its candidacy for accession to the IEA is weighed up.

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